2008 New York Law Journal Online

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Supplemental Needs Trusts: A Hidden Medicaid Lien?

Jay J. Sangerman

11-07-2008

This article explores further whether there is a "secret" Medicaid lien in Arkansas

Department of Heath and Human Services v. Ahlborn.1 The Third and the Second

departments have since weighed in on this question.

The issue is whether, upon the death of the supplemental needs trust beneficiary,

Medicaid is entitled to collect the "total"2 of all Medicaid services provided (i) during the

lifetime of the trust beneficiary or (ii) only as of the date of the creation of the

supplemental needs trust (SNT).

In terms of Alhborn, if Medicaid's remainder interest in the supplemental needs trust is for

lifetime Medicaid provided to the trust beneficiary, then any reduced Medicaid lien against

the lawsuit proceeds based upon the Ahlborn analysis, or as a result of negotiation with

the Medicaid district, comes within the ambit of Medicaid's remainder interest. Therefore,

as the Medicaid district sought in Ruben N., discussed below, the extent of Medicaid's

remainder interest in the SNT may be many times greater than the financial benefit that

the disabled trust beneficiary would receive from Medicaid services during the term of the

SNT.

Thus, under Medicaid's analysis in Ruben N., it could be financially imprudent to create an

SNT. The extent of Medicaid's remainder interest in an SNT has been an open question

until the Third Department and Second department decisions discussed herein.3 The Third

Department decision In the Matter of the Estate of Abraham XX4 held that Medicaid's

remainder interest is based upon the reimbursement provisions drafted in the SNT,

concluding that Medicaid is entitled to reimbursement for all Medicaid provided to the trust

beneficiary both prior to, and as of, the creation of the SNT.

On the other hand, the Second Department, in the Matter of Ruben N.,5 decided about a

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year after Abraham XX, held that Medicaid's right to reimbursement flows from the SNT

statute and is limited by federal and New York State reimbursement statutes. The Second

Department concluded that Medicaid's reimbursement from the Ruben N. SNT for Medicaid

paid is only as of the date of the order directing the creation of the SNT. Although the two

decisions may appear to have different holdings, as the Second Department queried, the

two decisions may not be in conflict.

'In Matter of Estate of Abraham XX'

In re Abraham XX pertains to an infant plaintiff in a medical malpractice action due to

circumstances at birth. By order of the court, dated Dec. 22, 1998, after a verdict,

$1,707,884 was allocated to satisfy the Medicaid lien through March 23, 1998, the date of

the verdict, leaving a significant portion of unpaid Medicaid lien against the proceeds. The

remaining funds were allocated to a supplemental needs trust and the SNT was funded on

Sept. 13, 1999. Upon Abraham XX's death, Medicaid asserted a claim against the SNT for

all Medicaid paid from March 24, 1998.

The lower court held that Medicaid could not assert a lien from March 24, 1998 through

Dec. 22, 1998, since the district failed to amend its original lien or appeal the order

allocating the settlement funds. The lower court, however, held that Medicaid is entitled to

reimbursement for all Medicaid provided as of the compromise order. Both the estate and

Medicaid appealed. On appeal, the estate argued, inter alia, that Medicaid is prohibited

from obtaining reimbursement for "correctly paid" Medicaid (i.e., Medicaid paid when

there were no countable resources to pay for medical needs), except under certain

statutory circumstances.6 SNTs, the estate argued, do not fall within any of the statutory

exceptions whereby Medicaid may obtain reimbursement for "correctly paid" Medicaid.

Therefore, the estate argued that Medicaid's remainder interest in the SNT can only be as

of the date of the creation and funding of the SNT, i.e., the date that funds first became

"available" for the trust beneficiary's use and benefit. The Medicaid district countered that

the SNT statute7 creates a further exception under which Medicaid has a right to

reimbursement for "correctly paid" Medicaid, which, Medicaid argued, gave it the right to

reimbursement for all Medicaid paid during lifetime.

The Third Department disagreed with both the estate and the Medicaid district, holding

that Medicaid's right to reimbursement is not based upon statute, but "flows from the

terms of the SNT agreement itself . . . "8 Therefore, based upon the reimbursement

provision drafted into the SNT, the Third Department held that the Medicaid district was

entitled to reimbursement for the entire unpaid Medicaid lien against the medical

malpractice proceeds through the final date of Medicaid services.

In the Matter of Ruben N., Ruben N. had Down's Syndrome and began receiving Medicaid

assistance as of July 1, 1992. On July 14, 1997, Ruben N. suffered an injury, resulting in a

medical malpractice action, which settled by compromise order. Unlike Abraham XX, the

total amount of causally related Medicaid was paid at the time of settlement. Pursuant to

the compromise order, Ruben N.'s sister initiated a guardianship proceeding for the

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approval of a supplemental needs trust. The trust was created on Jan. 15, 2003. Ruben N.

died on Sept. 22, 2003. Medicaid asserted a lien of $632,714, representing all unpaid

Medicaid provided to Ruben N. during his lifetime. The trustee argued that Medicaid was

entitled to recover $50,226, reflecting the amount of Medicaid provided to Ruben N. as of

the date of the creation of the SNT.

Similar to Abraham XX, the Medicaid district argued that the SNT statute creates an

additional exception under which Medicaid has a right to reimbursement for "correctly

paid" Medicaid. The Medicaid district argued that there is quid pro quo in the creation of a

supplemental needs trust, i.e., an obligation to pay for lifetime Medicaid, which otherwise

never would have been payable.9 The Second Department, contrary to the Third

Department, undertook a statutory analysis of the exception statute for "correctly paid"

Medicaid and the SNT statute. The Second Department, agreeing with the trustee, held

that the SNT statute does not create an additional exception for "correctly paid" Medicaid;

therefore, Medicaid's remainder interest is only as of the creation of the trust. Consistent,

however, with Abraham XX, the Second Department held that the date for the creation of

the SNT is deemed to be as of the date of the compromise order.

Analysis

Each appellate division prevented a "gap" in reimbursement to Medicaid from the SNT

from the date of the first order directing the creation of the SNT to the establishment of

the trust. The Third Department also prevented the avoidance in the payment for the

Medicaid lien not included in the infant's compromise order, which was not an issue in

Ruben N. Appeal arguments on Abraham XX were heard on Oct. 14 before the Court of

Appeals. A decision may be pending later this month. Ruben N. is not being appealed. It is

unclear whether there is any conflict between the two appellate decisions.

The Second Department succinctly stated that if the Third Department, by its reasoning,

intended to require reimbursement for lifetime Medicaid services, "we would not agree

that the election to create a supplemental needs trust with the requisite eligibility

language would authorize the recovery of such assistance."10

Issues in Settlement, Drafting

Notwithstanding any different outcome in the appeal in Abraham XX, these two decisions

provide certain significant issues for consideration in case settlement and in the drafting of

SNTs:

1. In the instance where the Medicaid lien is reduced based upon an Ahlborn analysis,

should the Court of Appeals affirm the Third Department and hold that Medicaid is entitled

to lifetime Medicaid, then the reduced Medicaid lien due to Ahlborn comes back as part of

Medicaid's remainder interest in the SNT. Under Ruben N., the Ahlborn-reduced Medicaid

lien does not come within Medicaid's remainder interest. However, under both decisions,

Medicaid's remainder interest in the SNT is retroactive to the date of the first order

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directing the creation of an SNT and, perhaps, based upon Abraham XX, as of the date of

the last calculation of the Medicaid lien against the settlement proceeds.

2. Each appellate decision holds that Medicaid's right to reimbursement from the SNT is as

of the date of the order directing the trust. Therefore, when settlement funds for a minor

are "unavailable" to the infant plaintiff until the age of majority (i.e., placed into "locked

accounts" or into a structured settlement annuity with no payments until the age of

majority), creating the opportunity for the infant plaintiff to continue to be Medicaid

eligible, is Medicaid's remainder interest in the SNT as of the date of the infant's

compromise order or as of the date of the subsequent order, issued upon the infant's

attaining the age of majority, approving the creation of the SNT?

These two decisions make it appear that Medicaid's remainder interest in the SNT is as of

the earlier date of the compromise order, which may have been issued years prior to the

creation of the SNT. Therefore, there is no reason to delay the creation of the SNT during

infancy when there may be significant medical costs until the age of majority, as some

planners recommend, in order to reduce Medicaid's remainder interest in the SNT by

arguing that the assets were "unavailable" during infancy.

Each appellate division appears to be stating that it will not uphold planning for placement

of settlement proceeds that has the effect, or intent, of potentially defeating a portion of

Medicaid's prospective remainder interest in an SNT accrued from the time of the infant's

compromise order directing an SNT in the future (and perhaps from the date of the ICO

whether or not mentioning an SNT) to the date of the establishment of the SNT.

Therefore, if the SNT is later created, Medicaid's remainder interest in the SNT may be the

same irrespective of whether it is created at the time of settlement or at the age of

majority.

3. Notwithstanding Ruben N., Medicaid districts, based upon the language in the SNT,

may still have a remainder interest in the SNT for lifetime Medicaid paid, consistent with

Abraham XX which held that the terms of the SNT control. Many attorneys draft the SNT

reimbursement provision to state that Medicaid is entitled to all Medicaid paid on behalf of

the trust beneficiary during the lifetime.11

Conclusion

In the instance of lifetime reimbursement language, it appears that Medicaid,

notwithstanding Ruben N., is entitled to lifetime Medicaid, i.e., the trust language prevails

and "trumps" the holding in Ruben N. It is best to draft SNTs utilizing the statutory

reimbursement language without change. Attorneys should also review the

reimbursement language in the SNTs that have been drafted for their clients, and, if the

SNT states that Medicaid is entitled to recover for lifetime Medicaid at the death of the

trust beneficiary, it is necessary to consider whether the SNT can be reformed in light of

Ruben N.

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Jay J. Sangerman is principal of Jay J. Sangerman PLLC, a boutique law firm that

concentrates in assisting attorneys in case settlement and the drafting of trusts, such as

supplemental needs trusts.

Endnotes:

1. See Outside Counsel, dated Nov. 16, 2006. See 547 U.S. 268, 126 S.Ct. 1752; 164

L.Ed. 459 (2006).

2. The issue is what does the word "total" mean in the supplemental needs trust statute:

(i) A trust containing the assets of an individual under age 65 who is disabled . . . if the

state will receive all amounts remaining in the trust upon the death of such individual up

to an amount equal to the total medical assistance paid on behalf of the individual . . . .

42 U.S.C. 1396p(d)(4)(A) and the conforming New York State Social Services Law 366

(2)(b)(2)(iii).

3. The Department of Health of the State of New York has not taken a position on whether

the remainder interest in the SNT is lifetime or date of trust, leaving the determination to

each Medicaid district.

4. 36 AD3d 1085, 827 NYS2d 769 (2007), lv granted 10 NY3d 706, 886 NE2d 804, 857

NY2d 39 (2008).

5. 2008 NY Slip Op 06997 (2nd Dept. Sept. 16, 2008).

6. 42 U.S.C. 1396p(b)(1) and SSL 369 state that there can be no recovery for

"correctly paid" Medicaid except for payments made as of age 55 "for medical assistance

consisting of nursing facility services, home and community-based services, and related

hospital and prescription drug services . . . ."

7. 42 U.S.C. 1396p(d)(4) and the conforming New York State Social Services Law 366

(2)(b)(2)(iii).

8. The trust provided for reimbursement, to the extent then required by law, for

expenditures made for medical assistance for Abraham J. Gold by the State of New York

and the Broome County Department of Social Services.

9. See Appellant's Brief at pages 15-16.

10. See Ruben N. at Footnote 1.

11. See Cricchio v. Pennisi, 90 NY2d 296, 303, 660 NYS2d 679, 681 (N.Y. 1997), wherein

the plaintiff argued, in an attempt to defeat Medicaid's receipt of a lien against the

settlement proceeds at the time of settlement, that Medicaid is entitled to reimbursement

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for all Medicaid paid during the lifetime of the trust beneficiary.

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